Sabre: Top Travel Pick For 2021-2022
Summary
- Sabre is one of the largest global distribution systems (GDS) for worldwide travel. It's presented here as an alternative investment to individual airlines, hotels, cruise lines or ETFs.
- The company invested heavily in its technology during the travel recession by upgrading to the Cloud, is working closely with Google AI, and is now gaining market share over rivals.
- The company's economic model is relatively easy to follow: transaction-based revenues which correlate with the TSA travel numbers (links provided below).
- There has been a high (bullish) ratio of call-buying over puts in the January to April 2021 time frame.
- As worldwide travel resumes, the stock could double in 2021-22.
Sabre (SABR) has been a great recent discovery for me. Amidst all the bearishness in the travel industry this year, Sabre wisely plowed its resources into technology upgrades for 2019-20 by transitioning its platform to the cloud, and now this cost-cutting and upgrading will go straight to its-bottom line as volume transactions rise in 2021-22.
Sabre is one of the travel industry's largest global distributions systems (GDS), alongside Amadeus (OTCPK:AMADY) and Travelport (private). Together, these three companies comprise 97% of all travel bookings worldwide. An investment in Sabre places an investor squarely at the center of global travel sales.
Sabre's system:
- Processes more than 42,000 transactions a second.
- 57,000 travel agencies around the world log into a Sabre desktop each day.
- Is available 24/7, seven days a week.
Which travel websites use Sabre?
- Expedia (EXPE): Orbitz, Travelocity, Hotels.com, Tripadvisor.com, SeatGuru.com, Cheaptickets.com
- Booking (BKNG): Kayak, Agoda, Priceline, CheapFlights, Momondo, OpenTable, RentalCars
- Google (GOOG) (GOOGL) Flights and Hotels
- Hilton Worldwide (HLT)
- Marriot (MAR)
- Hyatt Hotels (H)
- Caesars Entertainment (CZR)
Sabre's revenue is based on the volume (number) of transactions it processes, not the dollar value of those transactions. Thus when transactions escalate in an economic recovery, Sabre's revenues increase commensurately.
Given that 2020 will go down in history as the worst travel year of the modern era, it is not a stretch to envision a return to normalcy in 2021-22, and with it, positive growth for Sabre. This process of recovery has already begun. (See: Sabre shares gain after busiest air travel weekend since March by Brandy Betz, Dec. 28, 2020).
Sabre currently trades at half its 2019 value, and I think there is more to come.
The company recently received upgrades from both Morgan Stanley and Mizuho (See: Sabre shares gain 4.7% after Morgan Stanley's bullish upgrade and doubled price target by Brandy Betz, Dec. 17, 2020). Because Sabre's revenues follow transaction data, its data foreshadows a what's-to-come-in-travel, a bellwether, so to speak, of the travel and hospitality industry.
Sabre's global distribution system (GDS) is an immensely complex web of technologies that facilitates transactions between service providers in the travel industry. Travel agencies are their foremost customers. They use the GDS to gain real-time access to inventories in order to book hotel rooms, airline tickets, car rentals, cruises, trains and other travel products for their customers.
A recent addition to this software has been the New Distribution Capability, or NDC. It is an XML standard created by the International Air Transportation Association (IATA). It allows airline service-providers to deliver rich content and ancillary services to their customers.
NDC provides the ability to customize individual tickets with choices (flight class, seat, meals, perks, etc.) and can increase value-added revenues for every single airline ticket. This capability has led to billions in increased revenues for airlines.
The chief takeaway for investors here is that high barriers exist to new entry in this field of technology, and only three companies direct most of the sales traffic. Competition for the travel-dollar is intense.
[To see how GDS and NDC systems work, watch this Video: "How airline distribution works | Global Distribution Systems | New Distribution Capability (NDC) by Altexsoft, Jan 18, 2019.]
Sabre is the oldest of the GDS and dominates the Northern Hemisphere. It also owns Abacus, which is the largest GDS in Asia. Combining all its component parts, Sabre has a 35% market share and manages more than $260 billion in global travel each year.
Amadeus is next in line, with dominance in Europe. It was originally created by Air France (OTCPK:AFRAF), Lufthansa (OTCQX:DLAKF), Iberia and SAS Airlines as a European-based alternative to Sabre.
Amadeus is the largest GDS system, with around 40 percent of travel agency bookings and is used by 90,000 travel agencies. It is based in Spain with a central database in Germany serving as a gateway to the European market.
The third is Travelport, a company that went public in 2014, but taken private in 2019. It has a 22% market share.
These three companies serve an immense swath of the worldwide travel dollar. But because only two of these companies are publicly-traded, an investor effectively owns the tech backbone of the travel industry if he/she has shares in just Sabre and Amadeus. Below are images of their logos and customer base (Information gathered from Altexsoft.com).
A video presentation of these three competing GDS(s) follows here. (See Amadeus vs Travelport vs Sabre: Explaining Main Global Distribution Systems by Altexsoft.com, September 12, 2020, View from 1:20-11.07 mins).
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Stock performance: Sabre vs Amadeus
One of the tenets of successful stock investing is to buy the future outcomes of a company, not its past performance. Although past performance can inform us how investors have viewed a company's prospects over time, the future is the primary consideration for new investment, because the clock starts when you buy it.
Over the last five years, Sabre has underperformed Amadeus by a whopping 135%! But in March 2020, a new element entered the picture. The daily volume in Sabre increased by around 300% and has remained consistent at this level throughout the nascent recovery, into late-December 2020.
Sabre vs Amadeus (five-year weekly chart)
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Sabre vs Amadeus (nine-month chart)
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After the sector bottomed in early April 2020, Sabre has outperformed Amadeus on the daily chart, and by a wide margin (+75%), since the vaccine announcements of November 9, 2020.
By buying these two companies, yet keeping overweight Sabre, an investor has a travel-technology pairing sensitive to the entire sector, yet without needing to pick or choose among individual hospitality or airline stocks.
What do the TSA numbers say about the travel recovery?
The Transportation Security Administration (TSA) has conveniently assembled a one-year spreadsheet, comparing this year's daily passenger count as a percentage of 2019's (day by day).
The TSA numbers bottomed the week of April 15, 2020, along with the prices of most travel and hospitality stocks. At the current rate of expansion, the TSA numbers have recovered almost 44% of 2019's values (December 27, 2020), and appear to be ramping into the New Year (2021). Below are Excel charts of the TSA data (Author's graphs).
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One quick, back-of-the envelope way to connect these TSA numbers to Sabre's revenue model (which is based on transaction volume) is to measure the current level of traffic to Sabre's share price. 44% of last November's highs (2019) at $24 gives a share price of $10.56, a level that Sabre has retreated to three times since breaking to the upside in early November, 2020.
What must be taken into account here, however, is the expected acceleration of travel transactions over the coming four quarters, and adjust Sabre's share price expectations to an improvement in 2021-22's travel outlook.
In December 2020, there was a three-week dip in US travel activity due to pandemic lockdowns, and so my estimate for the Q4'2020 TSA numbers (77.7 million, est.) is they will approximate Q3's (78.4 million, actual).
What is different in the quarterly results is the coming ramp in travel transactions (concurrent with the TSA passenger counts) which is beginning to accelerate. At the close of Q3'2020, the passenger count was 33% of 2019. With just a couple of passenger days remaining in 2020, Q4'2020 will be closer to 44% of 2019, an 11% improvement.
The success of travel in 2021 depends in large part on the efficacy of the vaccine rollout. In this regard, I am bullish.
As an investor we must ask ourselves, do I "pay up" to get a seat on the Sabre plane now, or do I wait until the actual numbers manifest themselves?
Worldwide vaccination begins on a large scale in January 2021, and a ramp in travel reservations for 2021 has already begun, evidenced by the doubling in some small-cap hospitality stocks (e.g. Hersha Hospitality Trust (HT), Park Hotels (PK)), the recent rise in domestic airline stocks (Southwest (LUV), Spirit Airlines (SAVE)), plus the international airlines (Delta (DAL), United (UAL), Azul (AZUL) and Lufthansa. Norwegian Cruise Line Holdings (NCLH) has already tripled since an April 2020 bottom and is not even sailing yet!
Travel and tourism are a significant part of the European Union's annual revenues. Europe is the global leader in international tourism, with over 600 million foreign tourists arriving in the region each year. 745 million tourists visited the EU in 2019, and in 2018, the travel and tourism sector contributed directly an estimated 782 billion euros to GDP. (See: Travel and tourism in Europe - Statistics & Facts by Statista Research Dept, December 3, 2020)
There is growing investor-enthusiasm around travel-related companies, and a time to consider entering this sector.
Sabre Options
Unusual options activity attracts the notice of seasoned traders. On October 22, 2020, Jon Najarian of CNBC alerted investors to a large volume of Sabre call options being purchased. I already owned the stock, but the mention encouraged me to track Sabre's options statistics.
Options ratios often reveal the near-term hedges of traders in a stock, and the skew of open-interest can give an investor a hint as to how the market is viewing a company's prospects.
Options activity is considered "unusual" when volume at a particular strike price - or in a particular direction (bullish/bearish) - is exceptionally high. Volume refers to the number of contracts traded at each price point. Contracts that have been traded but remain open are called "open interest". Bundled together in groups of calls or puts, the strike prices of "open interest" reveal the interest of the market in the future of the stock.
A large volume of contracts with expiration dates in the distant future is unusual and noteworthy too. Additional time on a contract increases the potential for it to eventually reach that strike price while also growing its time value. The purchaser is buying both time and price with an options contract. The more time on a contract before it expires, the better the chance of that stock reaching its strike price.
Lastly, a high volume of "out of the money" contracts is unusual because their strike prices can be far above the stock price (as in call options, bullish) or below the stock price (as in puts, bearish). These are risky options purchased when the contract's strike price is distant from the underlying stock price. The only way these options will become profitable is a dramatic change in the price of the underlying stock. Thus options activity in out-of-the-money calls and puts can often foreshadow a move in share prices.
Throughout Q4'2020, the ratio of call buying over options has been bullish for Sabre. Most of the volume has been at the $10, $12.50, and $15 strike prices.
After the November 9, 2020, vaccination announcement, Sabre traded 48,636,059 shares (5x avg daily volume) and 47,253 call options at the November $8, $9, and $10 strike prices were exchanged. Since then, the stock has advanced 70% from its deeply-oversold levels.
On Christmas Eve (December 24), an investor bought 1,724 of the April 20 calls, almost $8 "out of the money", which would require a 66% move higher in the stock to become profitable.
The April calls vs April puts ratio is currently the most bullish, especially with out-of-the money calls and puts (see tables below). The expectation of this call-buying is a move above $20 by spring 2021.
Although options activity is not specifically declarative, and we cannot know the true intentions of the purchasers, the overall summary of activity here appears to be very bullish.
Recent Contract Wins
Returning to the business side of things, there have been recent contract wins for Sabre. The ones of special note are the agreements with European carriers such as Lufthansa, British Airways (OTCPK:ICAGY) (Scandinavian Air [SAS.AB], Ryanair (RYAAY), plus Gulf Air in the Middle East. These airlines are in a territory traditionally held by its biggest competitor, Amadeus.
New Deal Wins to Aid Recovery
"Growing traction of Sabre's travel network solutions among airlines globally is expected to help the company stay afloat in the current uncertain environment. The agreement with Lufthansa Group airlines adds to the string of agreements entered by the company in the past few months.
Earlier this month, LATAM Airlines, South America's longest-serving airline, implemented its Select Shopping solutions on the carrier's website and call center. Additionally, Gulf Air, the national carrier of the Kingdom of Bahrain, introduced new fares using Sabre's branded fares technology.
Moreover, in November, Sabre's Revenue Optimizer solution was implemented by Croatia Airlines and GOL Airlines, Brazil's leading domestic airline. Further, the company extended its partnership with Qantas to provide information to the agents about the airline's fares, products and services." (See: Sabre Signs New Distribution Deal With Lufthansa Group, Zacks, Dec 17, 2020.)
Lastly, there is the announcement on October 22, 2020, of Sabre's new long-term partnership (10 years) with Google Cloud and AI. On the surface, it appears that Google flights and Google hotels will now be integrated into Sabre's platform on Google Cloud, thus eliminating competition from a could-be formidable partner. (See: Sabre and Google Develop Industry-First AI Technology for Travel, October 22, 2020)
The stock jumped 15% on the news (only to drop 22% over the next four trading days). But that was the last drop of the recession for Sabre. Eight days later it had advanced 66% from the pullback, and by December 4, 2020, was 100% above its October lows of $6.
So yes, Sabre is a volatile stock, but its chart gives an indication of where the stock is headed: a retracement of the four-week drop in February-March 2020.
The investment thesis here is to buy under $13 and hold for a run towards $20 in the springtime.
The aim of value investing is to identify quality companies. An investor reduces the risk of holding a value proposition (making a mistake) by buying it at the lowest ebb possible. The lowest of the lows for Sabre (SABR) were at the beginning of the hospitality recession in spring 2020, and at the end, in autumn.
Those times are now past, and Sabre is about to enter recovery phase in a new travel year. The stock has been hemming and hawing back and forth between $10.50 and $12.50 for a month, gaining and losing approximately 16% each time. Yet each time weakness seemed to give way to weaker, investors poured in and took the stock higher the following day.
The lesson here is not to sell on weakness, but to add. Don't get shaken out.
High-frequency traders will often allow individual investors and institutions to do the research and heavy-lifting first, and when a stock has finally proved itself and begun to move higher, they'll descend in a whirlwind of volatility, driving the stock up and down. It can be very confusing and disconcerting, but with volatile stocks, one should expect it.
If you are a buyer here, buy what you know you can hold on to. And if fortunate enough to have cash on hand, add to your position on pullbacks, of which there will be plenty. My target price for Sabre is $22.00-24.00.
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